Microsoft Slips Ahead of Earnings

NEW YORK ( TheStreet) -- Investors are anticipating slight gains in Microsoft's ( MSFT) fiscal fourth-quarter results, a quarter that's traditionally been a stronger one for the company. However, in the wake of PC sales headwinds and mediocre Surface tablet sales, and wide-scale restructuring, the market is bracing for the possibility of weaker outlook in the coming quarters and a hit to some key segments.

For the quarter ended June, software giant Microsoft is expected to book earnings of 75 cents a share on revenue of $20.73 billion, according to a Thomson Reuters survey of analysts. That's up from earnings of 73 cents a share on revenue of $18.06 billion in the year-ago period.

While Microsoft usually performs well towards the end of each fiscal year, mounting headwinds are undoubtedly putting pressure on the company. According to research firm Gartner, global PC shipments declined by 10.9% in the June quarter to 76 million units.

Given this environment, the division that produces Microsoft Office and has been an important revenue driver over the last eight quarters, could be on its way to experiencing a slowdown. The unit booked its best quarter ever in the prior quarter with revenue of $6.3 billion, up 11% sequentially. The concern now is that incremental demand may begin to fade from here.

Despite the PC sales deterioration, the company's Windows segment performance has been relatively robust. Further declines in Surface tablet sales and the wind-down in enterprise refreshes to Windows 7 could prove to be weakening factors. Bloomberg estimates a total of 1.5 million units of Surface tablets sold as of March; a mediocre number.

As Microsoft works to cope with the pain in the PC market and strives to further its strength in the tablet and smartphone market, Microsoft CEO Steve Ballmer last week announced a wide-scale organizational reshuffling geared towards bringing software and hardware closer together. While the company adjusts to the reorganization, productivity could be hurt for the next few months.

"Those investors who seek the company to unlock value by breaking up should realize that the pending reorganization makes that task much more difficult and centralizes power with the CEO in our opinion," Colin Gillis, a technology analyst at BGC Financial said in a note.

Gillis reduced his estimates for Microsoft on lowered expectations for Surface tablet sales and to reflect the lackluster state of the PC market. He now expects revenues to come in at $20.5 billion, with earnings expected to be 77 cents per share. Gillis estimates that 200,000 units of Surface tablets were sold in the fourth quarter.

Looking ahead to the first-quarter, Goldman Sachs analyst Heather Bellini expects revenue and EPS of $18.8 billion and 67 cents a share, respectively. That's lower than the Street estimate of $18.9 billion and 68 cents. For fiscal 2014, she expects total revenue of $85.1 billion and EPS of $2.96, versus the consensus target of $84.8 billion and $3.05. That's driven by the prediction of stronger Windows performance, assuming 5.7 million units in Surface sales and 6.9 million Xbox One sales in the Entertainment and Devices Division, which she said could be somewhat offset by lower Server & Tools revenue.

While Bellini has not adjusted her Windows forecast, she estimates that the gloomy global PC sales estimates imply a $100 million headwind to her fiscal fourth quarter revenue estimates and impacts EPS by a penny.

Microsoft shares were falling more than 1% to $35.33.

Written by Andrea Tse in New York

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